Surging electricity demand, attractive valuations, and potential interest rate cuts signal a promising outlook for the utility sector

The share prices of U.S. and Canadian utilities companies in general have not performed well over the past decade, lagging the broad market indexes. Reasons for this weaker performance include slow growth in electricity demand for power producers, as well as high interest rates that have hurt utilities overall.

However, several factors are now driving projections that U.S. electricity demand will increase substantially over the next decade. In addition, interest rates in both the U.S. and Canada have likely peaked, making the dividend yields of utility stocks more attractive.

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Is the decade of zero growth in U.S. electricity demand coming to an end?

After a decade of no growth, electricity demand in the U.S. is forecast to grow by 20% by 2030, according to forecasts . The main factors driving the expected growth are the rise in energy demand from datacentres used for artificial intelligence (AI), the expansion of domestic semiconductor and battery manufacturing, the onshoring of manufacturing after years of outsourcing, and the expansion of electric vehicles (EVs).

In fact, parallels can be drawn between the expected rise in electricity demand to the boom in power generation that followed the widespread adoption of air conditioning in the 1960s and 1970s. To quote Dominion Energy CEO Robert Blue, “Economic growth, electrification, accelerating datacentre expansion are driving the most significant demand growth in our company’s history and they show no signs of abating.”

Datacentres alone are expected to add about 323 terawatt hours of electricity demand in the U.S. by 2030, according to forecasts. That will represent 8% of total U.S. electricity consumption by the end of this decade.

The U.S. Southeast is the hottest datacentre market in the world, with Northern Virginia hosting more datacentres than the next five largest markets in the U.S. combined. Some 70% of the world’s Internet traffic passes through the region daily. The power company Dominion Energy forecasts that demand from datacentres in Northern Virginia will more than double by 2030. Further south, Georgia Power projects retail electricity sales growing 9% through 2028, with 80% of the demand coming from datacentres.

Are utility stocks poised for a market comeback?

The share prices and total returns (including dividends) of utility companies have more or less matched the returns of the broader U.S. market indexes over the long term. However, over the past decade, utilities have significantly lagged the broader market as U.S. power demand remained stagnant, and high interest rates made utilities less attractive to investors.

But this appears to be changing—the Utilities Select Sector SPDR ETF, which represents a broad selection of U.S. utility companies, is one of the best-performing sector ETFs so far this year. In addition, three of this year’s 10 best-performing stocks on the S&P 500 are utilities: Vistra, Constellation Energy, and NRG Energy. Vistra, up 133%, is ranked third, with its gain just behind Nvidia.

Are utilities offering a value opportunity in the current market?

The average price-to-earnings ratio of the major U.S. and Canadian utilities indicated in the table above is 18.3 times; the S&P 500 is trading at 22 times projected earnings. On the other measures indicated in the table above, utilities are also trading at a significant discount to the S&P 500. Meanwhile, falling interest rates will be a big plus for utility stock investors going forward–as will growth in datacentres. Given these factors, successful investors will want to include utility stocks in their well-balanced portfolios.

Will you be investing in utility stocks soon? Why or why not?